Accounting: Trading & Profit Loss Account

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Questions and Answers

Which asset is considered the least liquid in a Balance Sheet?

Sundry Debtors

Goodwill (correct)

Prepaid Expenses

Bank Overdraft

In preparing a Balance Sheet, which item would be listed last when ordered by urgency of payment?

Short-term Creditors (correct)

Outstanding Expenses

Owners

Sundry Creditors

When preparing a Balance Sheet in order of permanence, which of the following items is likely to appear first?

Plant and Machinery (correct)

Cash-in-hand

Accrued Income

Furniture and fixtures

Which liability would be shown last when preparing the Balance Sheet by urgency of payments?

Sundry Creditors Signup and view all the answers

Which income-related item is likely to appear early in the Balance Sheet ordered by liquidity?

Accrued Income Signup and view all the answers

What is the value of Total Purchases as represented in the Trading Account?

₹10,50,000 Signup and view all the answers

What is the formula used to calculate Adjusted Purchases?

Opening Stock + Net Purchases - Closing Stock Signup and view all the answers

Which of the following is NOT included in the Trading Account as per the information provided?

Freight & Cartage Outwards Signup and view all the answers

What is the total value of Sales after accounting for Return Inward?

₹12,40,000 Signup and view all the answers

What is the correct value of the Closing Stock shown in the Trading Account?

₹84,000 Signup and view all the answers

What is the total Gross Profit transferred to the Profit & Loss Account?

₹1,24,000 Signup and view all the answers

Which expense is classified as a direct expense in the Trading Account?

Freight and Cartage Inwards Signup and view all the answers

What does the value for Cash Sales amount to?

₹60,000 Signup and view all the answers

What is considered a tangible asset?

Land & Building Signup and view all the answers

Which of the following is an example of an intangible asset?

Trade Marks Signup and view all the answers

Fixed assets are usually valued at which of the following?

Cost less depreciation Signup and view all the answers

Which of the following is classified as a current asset?

Cash Signup and view all the answers

What characterizes a long-term liability?

Expected to be settled after 12 months Signup and view all the answers

Which of the following is an example of a current liability?

Bills Payable Signup and view all the answers

What does capital represent in a business context?

Excess of assets over external liabilities Signup and view all the answers

Which of the following assets is NOT classified under fixed assets?

Investment in Bonds Signup and view all the answers

What is required to prepare a Profit and Loss Account?

To bring down the Gross Profit/Gross Loss and pass closing entries Signup and view all the answers

What entry is made when closing the Profit and Loss Account for a net profit?

Profit & Loss A/c Dr. to Capital A/c Signup and view all the answers

How is a net loss accounted for when closing the Profit and Loss Account?

Capital A/c Dr. to Profit & Loss A/c Signup and view all the answers

Which of the following is NOT included in the items for a Profit and Loss Account?

Loan principal payments Signup and view all the answers

What are closing entries in the context of the Profit and Loss Account?

Entries that transfer balances of concerned items to the account Signup and view all the answers

Which item would be recorded as a profit in a Profit and Loss Account?

Profit on Sale of Short-term Marketable Securities Signup and view all the answers

What is the correct meaning of 'Gross Profit' in a Profit and Loss Account?

Total sales revenue minus cost of goods sold Signup and view all the answers

What signifies the completion of a Profit and Loss Account for the period?

The transfer of its balance to the capital account Signup and view all the answers

What is the primary criterion for arranging assets in a balance sheet?

Order of liquidity Signup and view all the answers

Which of the following represents the least liquid asset?

Goodwill Signup and view all the answers

In a balance sheet, how are liabilities arranged?

In order of urgency of payment Signup and view all the answers

Which of the following would likely be classified as a current liability?

Bank Overdraft Signup and view all the answers

What is the order referred to as when assets are arranged from least to most liquid?

Order of Permanence Signup and view all the answers

Which item is classified as a long-term liability?

Loan Signup and view all the answers

Which of the following is not classified as a current asset?

Furniture and Fixture Signup and view all the answers

What does the term 'Current Assets' typically refer to?

Assets expected to be converted to cash within a year Signup and view all the answers

Study Notes

Trading Account

The Trading Account is a summary of the revenue and expenses related to the buying and selling of goods.
The Trading Account includes adjusted purchases, which are calculated by adding net purchases to opening stock and subtracting closing stock.
Freight and Cartage Inwards, Wages, and Gross Profit are also listed on the Trading Account debit side.
Sales are listed on the Trading Account credit side.

Profit and Loss Account

The Profit and Loss Account summarizes the company's revenue and expenses to determine its net profit or loss.
Gross Profit from the Trading Account is transferred to the Profit and Loss Account.
The Profit and Loss Account is closed by transferring the balance to the Capital Account.
A net profit is transferred to the Capital Account on the credit side.
A net loss is transferred to the Capital Account on the debit side.

Fixed Assets

Fixed assets are used for producing goods or services and are not intended for resale in the regular course of business.
Fixed assets can be tangible, like property, plant, and equipment.
They can also be intangible, like goodwill, patents, and trademarks.
Fixed assets are usually valued at cost less depreciation.

Investments

Investments are assets held for the purpose of earning income, capital appreciation, or other benefits.
They include investments in shares, debentures, bonds, and immovable properties.

Current Assets

Current assets are assets held for conversion into cash, consumption in production, or rendering services within the normal course of business.
They include cash, bills receivable, and sundry debtors.

Long-term Liabilities

Long-term liabilities are expected to be settled after 12 months from the date of the balance sheet.
Examples include loans from financial institutions and debentures.

Current Liabilities

Current liabilities are expected to be settled within 12 months from the date of the balance sheet.
Examples include bills payable, trade creditors, outstanding expenses, bank overdraft, and installments of loans payable within 12 months.

Capital

Capital refers to the amount invested into a business by the owner, partner, or proprietors.
Capital is increased by profit and decreased by losses and withdrawals.

Estimated Amount of Contracts Remaining to be Executed on Capital Account

This refers to commitments the company has made to fulfill contracts that are not yet reflected in the financial statements.

Guarantees Given by the Company to Companies Under the Same Management

This reflects any guarantees the company has given to associated entities.

Gratuities Payable to Staff on Retirement or Death

This represents the company's liability for payments due to employees in retirement or death benefits.

Order of Liquidity

Assets are arranged in the balance sheet in order of their liquidity, with the most liquid assets listed first.
Liabilities are arranged in the order of their urgency of payment, with the more urgent liabilities listed first.

Order of Permanence

Assets are arranged in the balance sheet in order of their permanence, with the least liquid assets listed first.
Liabilities are arranged in the order of their urgency of payment, with the least urgent liabilities listed first.

General Format of a Balance Sheet in Order of Liquidity

The Balance Sheet lists assets on the right side and liabilities on the left side.
Assets are typically separated into categories, such as current assets, investments, and fixed assets.
Liabilities are typically separated into categories, such as current liabilities, long-term liabilities, and capital.

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Description

This quiz covers key concepts regarding the Trading Account and Profit and Loss Account in accounting. It explains how these accounts summarize revenue, expenses, and net profit or loss. Additionally, the significance of fixed assets in relation to these accounts is discussed.